Brazil hikes interest rates fifth time to 9.5%, no sign of stopping

Brazil hikes interest rates fifth time, no sign of stopping

7:43pm EDT

By Luciana Otoni

BRASILIA, Oct 9 (Reuters) – Brazil raised interest rates for the fifth straight time on Wednesday and gave no indication of backing off its battle with high inflation even as Latin America’s largest economy struggles to pick up speed. The central bank raised its benchmark Selic interest rate to 9.5 percent from 9.0 percent as expected by all but two of the 65 economists polled by Reuters last week.The central bank made no changes to the statement accompanying its decision, suggesting it could maintain the current pace of rate rises at its next meeting, in November.

Before the meeting, most economists believed the Selic would end the year at 9.75 percent, according to a weekly central bank poll released on Monday.

However, a growing number of economists have started to bet that interest rates could climb back into double digits next year to ensure inflation expectations for 2014 and 2015 fall towards 4.5 percent, the center of the government’s target.

Consumer price data released earlier on Wednesday showed 12-month inflation eased in September for the third straight month to 5.86 percent. But economists in the central bank’s survey see little room for inflation to ease further, projecting a year-end rate of 5.82 percent.

Some analysts say the bank may need to raise rates to between 11 and 12 percent to get inflation back to 4.5 percent.

That would be a major disappointment for President Dilma Rousseff, who boasted last year that the days of high interest rates in Brazil were over as the Selic fell to an all-time low of 7.25 percent.

Brazil’s economy, however, was slow to react to the monetary stimulus and has been stuck in a holding pattern of slow growth in the past three years. At the same time, inflation has remained stubbornly high, forcing the central bank to reverse course and start raising interest rates again.

Since April, the bank has raised the Selic by 225 basis points.

The repeat of the terse language used by the bank in its previous three decision statements may be taken by investors as a strong indication of another aggressive rate hike that could take the Selic to 10 percent on Nov. 27.

That scenario seemed more likely after central bank director Carlos Hamilton Araujo said last week that there was still “a lot of work to be done” to battle inflation.

Araujo, who is widely viewed as the most hawkish member of the eight-person monetary policy committee, made the comments after unveiling bank projections for inflation to remain above 4.5 percent until the third quarter of 2015.

 

August 28, 2013, 7:57 p.m. ET

Brazil Raises Key Interest Rate

The Central Bank Raised Its Selic Rate Half a Percentage Point to 9.0%, Reinforcing a Commitment to Curb Inflation

GERALD JEFFRIS

BRASÍLIA—Brazil’s central bank raised its key lending rate by a half percentage point on Wednesday, reinforcing a commitment to curb worrisome inflation despite concerns over the pace of economic growth.

In a widely expected move, the central bank’s monetary-policy committee voted unanimously to raise the Selic interest rate to 9.0% from the previous 8.5%, the fourth increase since April.

The latest move comes at a difficult time for the Brazilian economy. Growth has been sluggish at home and abroad, while inflation has remained stubbornly high. The statement confirming the decision was virtually identical to the statement published after the last meeting.

Wednesday’s decision will “put inflation on a downward trend and ensure this tendency persists next year,” the statement said.

The 12-month inflation rate, as of mid-August, was 6.15%, not far from the 6.5% upper limit of the government’s inflation-targeting band. But growth prospects are mediocre at best, with analysts saying the economy will expand no more than 2.5% this year after a near-recessionary 0.9% in 2012.

“With a 50-point increase, the central bank is signaling it has a commitment to firm monetary policy,” said Carlos Kawall, chief economist at Banco Safra in São Paulo. “We still have a very resistant process of inflation in Brazil that needs to be dealt with.”

The central bank, he said, will likely raise the Selic rate to 9.75% by the end of the year and could be forced to extend rate tightening into 2014 depending on how the economy and inflation behave.

Complicating matters is uncertainty about the pace of policy changes at the U.S. Federal Reserve and the impact of that uncertainty on Brazil’s currency. As the Fed has hinted it may start to withdraw stimulus, investors have sold the real, sending it nearly 15% weaker against the dollar so far this year.

The central bank has intervened heavily to try to contain the depreciation to limited effect. Since Friday, it has switched to a regular intervention schedule, to provide the market with a more reliable intervention scheme. The currency has recovered slightly against the dollar.

Still, a weaker real means higher prices for imports ranging from wheat and fuel to capital goods and mobile phone components. Some economists had said the central bank might opt for a more aggressive interest rate hike on Wednesday because of the currency problems.

“The bank has room to raise rates at a slower pace because of the additional measures taken in relation to foreign exchange, but there’s no doubt rates will have to continue to rise to bring inflation under control this year and next,” said Silvia Matos, a Getulio Vargas Foundation Business School economist.

Market projections for Brazil’s economy continue to point to more tightening ahead. According to the latest central bank market survey, the Selic rate is seen rising to 9.50% in October and remaining at that level through the end of 2014.

The central bank’s next interest rate decision is expected Oct. 9.